Berkshire’s worst performance in 10 years? Buffett: We’re better at defending

Even the most famous value investors find it difficult to find investment opportunities in the securities market. This could be Mr Buffett’s “subtle warning” to investors. In 2019, buffett’s 54th year at Berkshire Hathaway, the company’s Class A shares rose just 11 percent, far behind the nearly 30 percent gain in the S.P. 500 and the worst performance in nearly a decade.

Berkshire's worst performance in 10 years? Buffett: We're better at defending

Berkshire Hathaway has not made a single “elephant-class” acquisition that Mr Buffett has been making for years, causing the company’s cash reserves to surge to a record $128bn last year. It also means that Berkshire Hathaway earns little interest in a near-record low interest rate environment in the US.

Even the most famous value investors find it difficult to find investment opportunities in the securities market. Could this be a warning to investors by the “share gods”?

A good business is a “sky price”

It is five years since Berkshire Hathaway’s last “elephant-class” acquisition.

In 2015, Berkshire Hathaway agreed to buy Precision Parts, a precision parts company, for $32 billion. At the time, Mr Buffett warned shareholders that it might be difficult to make another big acquisition. In a February 2019 letter to shareholders, he also wrote that “companies with good long-term prospects are now ‘sky-high’.” ”

In November, Tiffany invited Buffett to make a bid after receiving a $16.6 billion takeover offer from luxury goods giant LVMH, although Buffett helped Tiffany during the financial crisis and Tiffany’s business added strength to the jewelry company that Berkshire Hathaway bought. But Buffett was reluctant to bid with LVMH and politely declined the request.

Mr Buffett also “quietly” bid $140 a share last year for Tech Data, the world’s second-largest computer marketing company, but retreated after private equity fund Apollo raised its bid to $145 a share because he did not want to be known for participating in public company auctions.

Mr Buffett said he was also looking for big acquisitionopportunits, but as a value investor he saw no exciting opportunities in the current market.

With Berkshire Hathaway’s proprietary business generating large amounts of cash and dividends from portfolio investments, Berkshire Hathaway currently has about a quarter of its market capitalisation on its balance sheet.

Buffett’s final path to Berkshire Hathaway’s cash deployment is to buy back shares. Even in this respect, Mr Buffett tends to slow down.

Buffett and Mr. Munger, Berkshire’s vice chairman, have had more discretion since Berkshire-Hathaway adjusted its buyback policy in 2018. But in the first three quarters of last year, Berkshire Hathaway bought back $2.842 billion in shares, a fraction of a profit for a company with $128 billion in cash reserves.

Defense is better than offense.

Did Berkshire Hathaway “fall the altar”?

“Since 2009, Buffett has emphasized in his letter to shareholders that ‘Berkshire Hathaway’s defense is better than offensive,'” Zhang Weiyu, an investment analyst at THE company and director of the Buffett Institute at Asia-Australia International Investment S. That is, Berkshire may lag behind the S.P. 500 when the broader market is performing well, but berkshire will outperform the broader market when the broader market performs negatively. ”

From historical data, we can see that berkshire Hathaway did not perform well in the strong years of 1966, 1969, 1973, 1977 and so on, while in 1967, 1970, 1975, 1984 and other weak years, Berkshire Hathaway showed strong defensive ability. Results tend to be better than the broader market.

So Mr Zhang believes that 2019 is not surprising in terms of Berkshire Hathaway’s historical performance.

In addition, Berkshire Hathaway shareholder Apu Research Institute analyst Zhang Nan told the International Financial Times, “Buffett has several times opposed the GAAP (GAAP) in the request of the unrealized portfolio capital gains and losses into the profit statistics of this new rule, The reason is that this change in market value will cause the Berkshire Hathaway profits to fluctuate. ”

As a result, Mr. Buffett advised Berkshire Hathaway investors to focus on operating profits, not earnings or losses, and that Berkshire’s true price-to-earnings ratio sits much higher than the share price. ”

“Subtle warning”

Over the past year, U.S. stocks have performed well, with the Dow Jones Industrial Average up more than 22 percent annually, the S.P. 500 up nearly 30 percent and the Nasdaq up more than 35 percent.

But even the most famous value investors find it difficult to find investment opportunities in the securities market. Mohit Oberoi, an analyst at marketrealist, said this could be Mr Buffett’s “subtle warning” to investors.

As the market nears record highs, few high-quality companies are in dire need of capital, and those that need it do not meet the requirements of Buffett and Berkshire Hathaway. Oberoi said.

So does this mean that Mr Buffett has foreseen the collapse of the “high valuation” market and will have the opportunity to allocate large amounts of cash?

Mr. Zhang told the International Financial Times that since he took charge of Berkshire Hathaway in 1965, Mr. Buffett has avoided almost every crisis and seized every opportunity. That is, when the market risk increases, reserve cash in advance to resist the risk, and when the stock price is relatively low, copy the bottom.

“A similar thing happened between 2008 and 2009, during which Mr. Buffett made an investment of about $50 billion, giving Berkshire Hathaway shareholders a long-term high-quality return. ”

Mr Zhang argues that Berkshire Hathaway’s cash pool grew at an unprecedented rate before the dotcom bubble of 2000, between 1998 and 1999, and that it had also had large amounts of cash between 2005 and 2007 before the 2008 financial crisis. After two crises, between 2000 and 2003 and 2007 and 2009, Buffett took advantage of the market downturn to buy a large number of undervalued stocks, making him the world’s richest man in 2008, when He was in the doldrums.

“As a long-term shareholder of Berkshire Hathaway, we are optimistic about Buffett’s large cash holdings and look forward to berkshire Hathaway’s next significant and substantial investment.” Zhang Nan said.

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